Cayman commits to BEPS rules to counter EU blacklist

Cayman has committed in principle to a project reforming the application of tax rules in cross-border business to combat the erosion of tax bases and the artificial shifting of profits to low or no-tax jurisdictions.

Developed by the Organization for Economic Cooperation and Development, base erosion and profit shifting (known as BEPS) refers to tax planning strategies that are used by multinational companies to exploit gaps and mismatches in tax rules to shift profits to low-tax jurisdictions where they have little or no economic activity.

Although the effects of the BEPS project on Cayman are “benign,” according to Minister for Financial Services Wayne Panton, government has committed to the project “for reputational reasons.”

The European Union considers non-adherence to the BEPS project’s principles as one of the criteria in the creation of a new blacklist of jurisdictions that it deems uncooperative in tax matters. Other factors include tax transparency and the effective exchange of tax information, as well as unduly low or no tax rates designed to attract profits from other jurisdictions.

In a speech delivered on behalf of Minister Panton, Chief Officer Dax Basdeo said that Cayman is a no-tax jurisdiction, and its business model “is mostly institutional” rather than focused on multinational corporations.

Cayman also does not have double taxation agreements that can be used to obtain tax benefits to the detriment of another jurisdiction. “BEPS therefore is expected to have a relatively benign effect on us,” Mr. Basdeo said at the Campbells Fund Focus conference last week.

As a cornerstone of the BEPS action plan, country-by-country reporting requires multinational companies to detail tax and financial information in relation to the global allocation of their income, taxes and other indicators of their economic activity. The aim is to increase transparency on where profits are generated, value is added and risks are taken compared to where a company pays tax.

“Subject to industry consultation, we will be implementing the transparency component of country-by-country reporting,” Mr. Basdeo said. A legal platform for its implementation already exists in Cayman through the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

The chief officer acknowledged that the EU might still regard Cayman’s lack of corporation tax and other taxes as a reason to include Cayman on the tax blacklist.

The EU blacklist criteria state that “a jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits that do not reflect real economic activity in that jurisdiction.”

The EU Code of Conduct Group on Business Taxation, of which the U.K. is still a member, is tasked with defining what this means.

“Tax rates are not off the table in terms of the EU blacklist,” but Cayman is engaging with the U.K. in this discussion, the chief officer said.

In addition, “Cayman fully supports the OECD’s position” in response to the EU initiative that transparency rather than tax rates is the more appropriate criterion in determining a list of “uncooperative” countries.

Cayman has always had zero tax rates, “which means we have not engaged in a race to the bottom in order to attract business,” Mr. Basdeo noted, and pointed to a track record of implementing tax transparency.

“The fact is, along with more than 100 jurisdictions, Cayman is implementing the OECD’s common reporting standard. We participate in the Multilateral Convention on Mutual Assistance in Tax Matters and we have been assessed as largely compliant by the Global Forum for Exchange of Information for Tax Purposes,” he said.

However, the EU’s decision not to screen EU members and other European countries like Switzerland and independent territories such as Andorra, Monaco, San Marino and Liechtenstein is raising concern in offshore financial centers.

Jude Scott, chief executive officer of Cayman Finance, said, “We fully support global standards, but they should apply to everyone.”

In an interview with Bloomberg BNA last week, Mr. Scott said, “There should be no difference in the way they are applied in the EU as they are outside the EU. If there are shortcomings, there should be discussions regardless of where they are located.”